New Crowdfunding Laws May Bring Additional Financial Benefits for Startups

Don’t know much about crowdfunding? It is a crucial internet tool that can help you raise the capital you need to get your small business idea off the ground and running. As crowdfunding websites have proliferated in increasing numbers, the U.S. government has decided to get involved. The new laws that will cover crowdfunding may actually serve to increase the amount of capital available to entrepreneurs, but at a cost.

What is Crowdfunding?

Crowdfunding websites like KickStarter, RocketHub and GoFundMe put entrepreneurs into contact with potential customers and investors located throughout the country and the world.

A great example of how crowdfunding works is the Spira Footwear company. Entrepreneur Andy Krafsur had tried to raise money the old fashion way in order to get his Spira Footwear business off the ground. However, donations from family and friends were not enough, leading him to join RocketHub, a New York-based crowdfunding website. Through RocketHub, customers sent Krafsur money to help support his shoe company, and in return he sent them discounted shoes. This worked so well that through RocketHub, Krafsur was able to sell around 6,000 pairs of shoes, while netting a profit of almost half a million dollars.

The New Crowdfunding Laws

As part of the federal Jumpstart Our Business Startup (JOBS) Act, the Securities and Exchange Commission (SEC) has created laws in order to regulate crowdfunding websites. The official goal of the JOBS Act is to provide “cost-effective access to capital for companies of all sizes,” which “plays a critical role in our national economy.” The JOBS Act further states that “companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations.”

While many in the crowdfunding business are concerned about the federal government sticking its nose into the business of e-commerce and entrepreneurship, the proposed rules seem to have some benefits. Under the rules, businesses participating on crowdfunding websites will have the ability to sell shares of stock of their business. As a result, through crowdsourcing, website investors would be able to purchase ownership rights in startups and other businesses utilizing crowdfunding websites. This ability to sell stock in one’s burgeoning company will allow entrepreneurs to have access to a completely new class of investors.

However, the requirements to sell SEC approved stock will most likely be extensive, and to many may be extremely onerous. The entrepreneurs at RocketHub believe that the federal regulators’ strict audit requirements for crowdfunding companies will impose a sharp financial burden on new small businesses. The new rules that allow for the selling of stock could also open crowdfunding websites up to potential investor lawsuits, thus requiring them to purchase expensive liability insurance plans. The costs to function under these new laws will inevitably be passed onto the entrepreneurs who utilize the crowdfunding websites.